24 March 2025

GBP

Last week, the Bank of England adopted a slightly more hawkish stance than anticipated, with only one policymaker advocating for an immediate rate cut. The Monetary Policy Committee maintained its benchmark rate at 4.5% with an 8-1 vote split, as only Swati Dhingra called for a 25-basis point cut. The committee reiterated their position, which was noted in the February minutes, that "a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate."

The decline in January's private sector pay growth supports the Bank of England's case for continued policy easing. However, with wage gains still high, a stabilising job market, and the potential for rising inflation, any policy changes will likely be gradual.

The latest employment data released last week showed regular pay growth in the private sector, which is closely monitored by the BOE, which fell to 6.1% in the three months to January, down from 6.2%. Overall wage growth remained steady at 5.9%. The Claimant Count indicated an increase in unemployment-related benefit claims.

The upcoming week is data-heavy for the UK, starting with Flash PMI data on Monday morning, followed by a speech from BoE Governor Bailey at 6pm. The main focus will be on the UK CPI year-over-year data, due Wednesday at 7am, with forecasts expecting a slight drop from 3.0% to 2.9%. If inflation slows more than expected, markets might price in a 25-basis point rate cut at the BoE's May 8th meeting, currently priced at 65%.

Wednesday also brings the release of the Annual Budget, where Chancellor Rachel Reeves is expected to announce spending cuts due to a £20.4 billion borrowing overshoot, raising the budget deficit to £132.2 billion. Rising benefits and public-sector wages have driven increased spending. Last week, the government introduced measures to save around £5 billion annually from welfare and confirmed that civil service running costs would be cut by 15%.

Retail sales will round off the week on Friday, and the report is expected to show a sharp decline from 1.7% to -0.3%.

EUR

Last week, EU leaders met in Brussels to discuss their involvement in Trump's initiative to expedite a ceasefire in Ukraine. In a cordial conversation with Trump, Volodymyr Zelenskyy agreed to a mutual cessation of strikes on energy assets with Russia.​

The US president pledged new support for Kyiv, including air defence systems, and proposed assistance in managing Ukraine's power infrastructure.

Data-wise, the final year-over-year CPI came in just below forecasts at 2.3% versus the expected 2.4%, which is unlikely to significantly impact the ECB's next interest rate decision on April 17th. Markets are currently pricing in a 25-basis point cut with a 59.5% probability. The German ZEW Economic Sentiment Index exceeded expectations, coming in at 51.6 versus the forecasted 48.1.

Eurozone Flash PMI data was released this morning, which showed positive momentum from the manufacturing industry, with France, Germany and Europe showing higher-than-expected figures; however, the services industry showed lower-than-expected results. This is followed by the German Ifo Business Climate index on Tuesday, which is expected to rise to 86.8. Spanish Flash CPI is anticipated to slow from 3.0% to 2.7%.

USD

Federal Reserve officials decided to keep the benchmark interest rate steady for the second consecutive meeting, maintaining it within the range of 4.25%-4.5%. This decision reflects concerns about the slowing economy and persistent inflation. The committee also decided to slow the pace of reducing its balance sheet, a move opposed by Governor Christopher Waller.

The latest rate decision comes amid pressure from President Trump's policy agenda, including fluctuating plans to impose tariffs on US trading partners. These tariffs have raised fears of an economic slowdown and increased inflation, leading to conflicting pressures on policymakers. Trump has previously advocated for rate cuts, however Fed Chair Powell has acknowledged that while inflation is rising, partly due to tariffs, he believes this effect will be temporary.

New Canadian Prime Minister Mark Carney on Sunday called a snap election for April 28, saying he needed a strong mandate to deal with the threat posed by US President Donald Trump, who "wants to break us so America can own us." His remarks underscored the sharp decline in US-Canada relations, as tensions have escalated following Trump's imposition of tariffs on Canadian goods and threatened to annex it as the 51st state.

The Fed's dot plot indicated lowered growth forecasts for this year and higher inflation estimates. It also suggested 50 basis points of rate cuts this year, though eight officials anticipated fewer reductions, highlighting their commitment to controlling inflation despite potential growth slowdowns.

For 2025, the economic growth forecast was reduced to 1.7% from 2.1%, with core inflation expected to rise from 2.5% to 2.8%. The unemployment rate estimate was increased to 4.4% from 4.3%.

Earlier in the week, retail sales came in below forecasts for the third month in a row at 0.2% versus the expected 0.6%, and Thursday saw unemployment claims come in slightly below estimates at 223K versus the forecasted 224K.

In the week ahead, US Flash PMI data will be released on Monday, followed by final quarter-over-quarter GDP data on Thursday, along with unemployment claims. The Federal Reserve's primary inflation measure, the month-over-month Core PCE Price Index, is expected on Friday, anticipated to align with last month's figure of 0.3%.

Views expressed in this commentary are those of the author, and may differ from your appointed Moneycorp representative. This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.